Financial crisis

Fancy nipping down the pub for a quick pint and maybe grab a latte and a croissant?

Published on: 18 Aug 2013

When I was in my teenage years, pubs in England were a very distinctive place; dark, smoky, slightly smelly, overwhelmingly male and mostly shut.

A legacy of previous societal norms meant that women rarely went into pubs unless they were with men.

A legacy of World War One legislation meant that drinks could not be served after 10.30pm or 11pm.  This generally meant a few hours of seriously intensive binging from about 8pm to 11pm, mostly on two nights per week.

croissantThis state of affairs was not great for earning a commercial return.  Pubs often occupy prime sites at expensive rental.  Trying to recover the operating costs of a business when the assets are only utilised for 10% of the time is a challenge and a half.

The first marketing innovation was to make pubs far more female friendly.

Curtains over windows were abolished in favour of plate glass windows.  Pubs started to sell a choice of wines.  The smoking ban came in.

Women were far now more likely to go to a bar with friends because the environment seemed less intimidating.  Unsurprisingly, where groups of young women went, groups of young men followed.

Doctors worried about the effects of all this on the nation’s health, but the tills kept ringing.

Laws governing opening hours were relaxed a few years ago, with some predictable, but probably transitional, issues of overindulgence, as a nation used to nanny closing the bar at 11pm now continued to serve, as people continued to drink at the, erm, efficient rate the previous law had dictated.

JD Wetherspoon runs a chain of bars in the UK, mostly in sites that previously were not bars. Car showrooms are a particular favourite choice of location because of the big windows that attract passing impulse customers.

They have started to open their city centre bars early in the morning, in an attempt to attract an extra crowd.

Some chains have slightly different staff uniforms in daytime and the evening; pseudo-Parisian coffee bar by day; unfussy drinking den by night.

The result is that JD Wetherspoon claims to sell 400,000 breakfasts per week (only McDonalds are bigger, with 600,000).

A recessionary environment means that customers have become open to the idea of hanging out in Wetherspoons with a cheap latte instead of a more expensive option in Starbucks.  It has achieved this growth remarkably quickly, as it only started to open for breakfast last year.

It’s a wonderful example of innovative business change, asset utilisation and absorption costing.

So, what’s this all about? Are things changing? Is it a load of bear or a load of bull?

Published on: 15 Aug 2013

The major stock markets around the world have been bear markets for the last couple of years but with the end of the recession looking like it’s here we should soon see a switch to a bull market.

Analysts around the world will be arguing one way or another on the timing of the recovery but where do the terms “bear market” and “bull market” come from?

There are two main views on the origin of these terms.

The first view is based on the methods with which the two animals attack.  A bear for example will swipe downwards on its target whilst a bull will thrust upwards with its horns. A bear market therefore is a downwards market with declining prices whilst a bull market is the opposite with rising prices.

The second view on the origin is based around the “short selling” of bearskins several hundred years ago by traders. Traders would sell bearskins before they actually owned them in the hope that the prices would fall by the time they bought them from the hunters and then transferred them to their customers. These traders became known as bears and the term stuck for a downwards market. Due to the once-popular blood sport of bull and bear fights, a bull was considered to be the opposite of a bear so the term bull market was born.

Whatever the actual origin of the terms though I’m sure most people will be relieved when we return to a bull market.

KPMG are into underwear and Deloitte are into shoes…

Published on: 16 Dec 2011

It’s a sign of the times but two of the UK’s highest profile high street shopping chains are in financial trouble.

La Senza, the luxury women’s underwear shop, has reportedly called in KPMG to help restructure the business.

Whilst some of the less professional male readers amongst you may well suggest that the first thing they should do is to undertake a reasonableness review of the lingerie brochures, the chances are that KPMG’s consulting work with La Senza will involve a lot more.

It’s possible that the retail chain will either get additional investment or perhaps more likely close a number of shops or even put the company into administration (this is where a company is controlled by an administrator who is independent from the directors and in effect decides for example whether the company can become a going concern again or whether it should be broken up or even liquidated)

Is it really a surprise though that the bottom has fallen out of the luxury underwear market?

With the onset of the recession many people are buying less luxurious underwear or simply making do with what they’ve got.

With the emergence of internet shopping there’s also the fact that the cost structure of these “bricks and mortar businesses” is significantly higher than retailers selling over the internet.

In simple terms, revenue is down but costs are still high. The end result is that a formerly profitable company has turned into a loss making business and La Senza is at risk of going bust.

Deloitte meanwhile have been appointed as Administrators of the shoe shop chain Barratts.

Barratts has nearly 200 shops in the UK and according to press reports Deloitte are said to be “working closely with suppliers to ensure the business has the best possible platform to secure a sale, preserve jobs and generate as much value as possible for all creditors.”

Whilst it’s not good news for the employees of La Senza and Barrats, I’ve got a feeling that unfortunately there will probably be more retail companies facing trouble on the high street in the near future.

Are the young ones always smaller?

Published on: 18 Nov 2011

I’m willing to bet that nearly all of you have used a Microsoft product. Probably an equally high proportion have used Google and a reasonably significant number of you will own an Apple product.

What about LinkedIn? Most of you have no doubt heard of it and a number of you will be registered with the website.

But did you know that Microsoft currently has one of 9.40, Apple has one of 13.61, Google has one of 20.30 and LinkedIn has one of well, … well, you’ll just have to wait a moment to hear the figure as it’s rather impressive.

So, what figures am I talking about?

The figures mentioned above refer to the PE ratio or the Price Earnings ratio.

In an attempt to astound you with my knowledge, the Price Earnings ratio measures… (wait for it)… the ratio of Price to Earnings (a round of applause please for that brilliant explanation).

In other words, the share price of Microsoft for example is such that the market is currently prepared to pay 9.40 times the earnings to own it.

The PE ratio is also sometimes known as the “price multiple”, “earnings multiple” or simply “multiple” and whilst share prices can be affected by a number of different things, a high PE ratio generally implies that the market is expecting earnings to rise in the future.

If we round up the PE ratios of the companies above we get:

Microsoft: 9

Apple: 14

Google: 20

That other tech giant on the market, LinkedIn currently has a PE ratio of 1,498 (yes, 1,498).

Wow – that’s not bad is it?

So hang on. A PE ratio this high implies that the market has factored in an expectation of significant growth in earnings for LinkedIn.

This really is an expectation of pretty significant growth as at the moment for every $1 of current earnings an investor gets he or she has to pay $1,498.

So, for the sake of the LinkedIn shareholders let’s hope that in the future more people become linked in.

Is this a children’s fairy tale or an adult horror story?

Published on: 02 Nov 2011

Forget about the Eurozone crisis that is currently dominating the news and instead, here’s a nice bedtime story to tell your children…

So children, are you feeling tired and ready for your story?

Once upon a time, in a land far far away there was a man called Gordon Reece (or Mr G.Reece).

Now Mr G.Reece was enjoying himself in the sunshine when suddenly everyone in the world started feeling happy and some wealthy friends and banks offered to lend him as much money as he wanted.

Mr G.Reece shielded his eyes from the sun and shook his head in disbelief. He couldn’t believe it but he gladly accepted the loans and with all that money he decided to treat himself.

He bought some houses, cars and a new Sony Playstation.

He even employed a couple of people to help him keep his house and garden tidy.

Things were going well but suddenly people around the world started becoming unhappy and didn’t buy as many things as they used to.

Mr G.Reece suddenly realised he had spent all of the money he had borrowed and didn’t have any money left to pay the interest on the loans.

He had an idea though. He could surely just go to another bank and get a new loan so that he could pay the interest.

Alas for Mr. G.Reece the banks didn’t want to lend him any more money as they knew he couldn’t afford to pay them back.

He then had another idea. To reduce his outgoings he would get rid of one of his employees and pay the other one a lower salary.

His employees were so upset that they messed up his house and garden and told him that they would carry on messing up his house and garden until he reinstated the job and the previous salary.

He then suddenly remembered his wealthy friends that had lent him money (a Mr F.Rance and Mrs G.Ermany). He gave them a call, explained the situation and they kindly agreed to write off some of the debt he owed them and also gave him a bit of cash to help him through the next few weeks.

His interest payments were now lower which was good but he was still struggling to pay the interest and the wages of his employees.

He decided that maybe this time he should actually go and visit his wealthy friends Mr F.Rance and Mrs G.Ermany and persuade them to write off even more of the debt and maybe give him some more money.

He jumped on a plane and headed to see them. He was feeling fairly positive when he arrived to meet his wealthy friends but then his face suddenly dropped.

There, heading to see the wealthy friends were none other than Mr P.Ortugal, Mrs S.Pain and Mr I.Taly. Three of his poorer friends who were also hoping to be given some money.

The problem though is that the wealthy friends don’t have enough money to give to all of the poor friends.

So children, what can they do?

Well, it’s time to go to sleep now kids and the story will be continued another night so sleep well, sweet dreams and don’t have any nightmares…

Sorry to break the news to you but Christmas is cancelled…

Published on: 14 Oct 2011

3 years ago in the middle of the financial crisis when some of the best known banks in the world were on the verge of collapsing, the Royal Bank of Scotland (RBS) was rescued by the British tax payers to the tune of £45 billion.

Since then the bank has been under a lot of scrutiny. Not just from the point of whether it would survive but also when it would turn things around so that the business became profitable and the tax payer would start to get their money back.

Along with lots of other companies that have suffered in the crisis, RBS has undertaken a cost cutting exercise over the last couple of years.

Chris Kyle, the CFO of the Investment Banking division of RBS yesterday announced some additional cut backs to his staff.

An internal memo to his staff told them amongst other things that:

– No-one will be given a new Blackberry phone or other handset.

– There will be no magazine or newspapers subscriptions (I guess this now means that they won’t be able to do the daily FT crossword over morning coffee in the office)

– People working late in the office will not be able to claim a taxi expense to take them home unless they are working past 10pm (it used to be a 9pm cut off)

The bank has also banned all staff entertaining for the rest of the year so there will be no bank funded Christmas party for the RBS investment bankers and instead the bankers will have to pay for their office Christmas party themselves.

Now, whilst some people will think this is good cost control some others may feel that this is just “window dressing” to give the impression that the investment bankers’ excessive remuneration and benefits are being stopped.

Some of the RBS employees may well be a bit upset about having to pay for their Christmas party but last year over 300 key staff within the bank reportedly shared a bonus pot of £375 million which equals an average bonus of over £1.1 million each.

I guess these particular individuals are quite relaxed about buying their own Christmas drinks…

Can I have a skinny latte, a blueberry muffin and a corporate loan please?

Published on: 05 Oct 2011

One of the real challenges facing a lot of companies at the moment is access to funds.

The economic turmoil over recent years has led to the loan markets largely drying up and without access to suitable cash reserves a number of firms have hit cashflow problems and have gone out of business.

Similarly, a lot of businesses that have wanted to start up in the recession haven’t had access to loan funds to enable them to do so.

The end result is that jobs have been lost.

The global coffee chain Starbucks though think that they may have an answer to some of the funding problems.

They have just launched a campaign to try to stimulate job growth in America by launching a “Create Jobs for the USA” initiative.

They are partnering in this initiative with Opportunity Finance Network (OFN), a group of private financial institutions that provide affordable loans to certain parts of the American population including low-income people and communities.

As well as donating $5 million to get the project off the ground Starbucks are also covering the admin expenses of OFN as well as paying for the manufacture of wristbands which will be given to any of their customers who donate $5 in one of their coffee shops.

Starbucks Chairman and CEO Howard Schultz said “Small businesses are…employing more than half of all private sector workers – but this critical jobs engine has stalled. We’ve got to thaw the channels of credit so that community businesses can start hiring again.”

100% of the donations made will go to OFN to help fund loans to community businesses including small businesses, microenterprises and nonprofit organizations.

Starbucks themselves though have also been a victim of the recession with several hundred stores being closed in the US alone in recent years and some sceptics may argue that this is just a PR initiate by them.

My personal view though is that if this initiative helps to create jobs then it can only be a good thing.

What will make Ernst & Young different from the rest of the Big 4? Will it be an Executive Decision or…

Published on: 09 Jul 2010

According to reports this week, Ernst & Young will be the first of the Big 4 to appoint non-executive directors to its global advisory council.

This is a major move for the accountancy profession.

The profession has been under increasing regulatory pressure for a while now and the decision to appoint non-execs is reportedly in response to the new audit firm governance code that was published earlier this year.

The revised Ernst & Young advisory council structure will in broad terms mean that Ernst & Young will have a board structure which is similar to the multi-national companies that are their clients. Their remit will include monitoring strategy and risk.

Their global advisory council currently includes 36 senior partners. These partners will soon be joined by 4 non-executive directors drawn from the business and regulatory world.

The names of these non-execs will be disclosed later this year and although I’m not a betting man I’d probably have a wager that their CVs will not include the names of Deloitte, KPMG or PricewaterhouseCoopers.

IFRS 9 released. This is a biggie.

Published on: 29 Nov 2009

On 12 November 2009, the IASB issued IFRS 9 “Financial Instruments”.  This is the first stage of a three stage project that will probably make or break the international reputation of the IASB and its deeply impressive chairman, Sir David Tweedie.

The IASB inherited IAS 32 and IAS 39 from its predecessor, the IASC.  IAS 32 and IAS 39 have been rather markedly unloved ever since their introduction.  IAS 39 in particular has been criticised for taking fairly complicated financial transactions and making them more complicated still with piecemeal rules for different types of transaction.  Although it definitely had its supporters, many people said that the perceived complexity of IAS 39 made it insufficiently understandable by most people to be much real use.

Here at ExP, we believe that IAS 39 has had a slightly unfair press over the years.  It does have its faults for sure, but it also has a decent logic at its core.  The new IFRS (which will come in three parts over the next year; the next two stages to deal with impairments and the third phase to address hedging rules) has a tough job.  Make the rules simpler and it will create loopholes that will be exploited by creative accounting.  Close every possible gap and it will result in an accounting standard that puts on weight each year with minor amendments and ends up not understandable.

The attempts at simplification are honourable.  We’ll wait to see with interest how well they work.  But well done to the IASB for keeping calm in the global financial crisis that many commentators blamed the accountancy profession for making much worse.  They were under huge pressure to make change and they appear to have done a good job in the time they had available.

Are accountants to blame for the global crisis?

Published on: 14 Oct 2009

A few accounting standards arguably have an unfortunate tendency to exaggerate the economic cycle.  During a time of economic downturn, the chances of a company having impaired assets is increased.  This has the unfortunate effect of taking poor trading results and augmenting them with impairment losses.  In other words, accounting conventions take a bad situation and make it worse.

Or so some people would say.

Some financial instruments are also shown at fair value.  Fair value is primarily decided by reference to market values. During a slump, this also makes reported results worse.

The argument advanced by many is that we ought to amend accounting standards to introduce some sort of dampening effect – requiring companies to impair assets or make provisions during times of boom and release these provisions during a slump.  This, it is argued, is only the equivalent of making hay while the sun shines.

There’s only one problem with this idea of “dynamic provisioning”. Mostly, it flies in the face of the definition of a liability in the Framework. Also, it’s precisely the opposite of what IAS 37 and IFRS 4 (insurance contracts) aimed to do. Fiddling with the accounts to save people from unjustifiable optimism and excessive, groundless pessimism might be politically popular in the current  market turbulence, but arguably it would only reduce the reliability of financial reporting in the long term.  Investors ought to be smart enough to use other information provided to them, such as the statement of cash flows, before reaching judgement on the desirability of a company’s shares.

We hope that the IASB stick to their guns and resist the pressure to codify creative accounting and massaging figures by bogus provisions. We’re confident that they will.

The ExP Group